What’s the Big Oracle Problem That No One Is Talking About?

Wall Street is focusing on Oracle's big revenue and EPS miss, but for long-term investors there might be something far worse to worry about.

Jun 23, 2014 at 10:30AM

Oracle Corporation (NYSE:ORCL) shares fell sharply after the company's fiscal fourth quarter missed revenue and EPS expectations. As a result, investors are showing some fear that its initiatives to grow software in the cloud is facing roadblocks. Yet, compared to cloud leaders Amazon.com, Inc (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) , are these concerns appropriate?

Currently insignificant
Oracle is a company that earns 75% of its revenue from software, and over the last year has worked diligently to create a recurring revenue business model through this large presence. One method has been large investments and acquisitions in the cloud as Oracle attempts to become a market leader and dominant in cloud app (SaaS), app platform (PaaS), and the cloud infrastructure (IaaS) industries.

In its fiscal fourth quarter these businesses created $450 million combined and accounted for only 4% of its total revenue.   While these businesses are small, they are the company's fastest growing segments. As the market for such services grow larger, most analysts believe that they will eventually become a large piece of the company's overall fundamental pie.

Here's the problem
The problem for Oracle in the cloud industry can be seen once you dig deeper into the numbers, or look beyond the headlines. At first glance, Oracle's 25% growth in the combined SaaS and PaaS segment and its 13% growth in laaS looks solid. Especially when you consider that overall revenue grew just 3.4%. Yet these numbers actually represent a loss in market share.

Synergyresearch Cloud Market

Amazon and Microsoft are the current market leaders in the laaS and PaaS industries. In the first three months of 2014 Amazon and Microsoft saw year-over-year growth of 67% and 154%, respectively. Amazon currently commands 30% of the overall market while Microsoft owns a much smaller 8% share,   but is gaining ground quickly. The remaining market is saturated with big and small technology companies that have services of their own.

Why is everyone interested in the cloud?
In the first quarter Synergy Research estimates that the overall laaS and PaaS market grew 50% with trailing 12 month revenues surpassing $12 billion. In the first quarter alone total revenue reached $3.5 billion. Therefore, Amazon surpassed $1 billion in quarterly sales while Microsoft's revenue is fast-approaching $300 million.

With that said, Oracle reporting $450 million would lead many to believe that its market share is larger than Microsoft, but the key element investors must take into consideration is its SaaS presence. Neither Microsoft nor Amazon's figures are shown including SaaS, which is notably Oracle's largest segment.

Therefore, with growth of just 25% in its combined SaaS and PaaS segment and a 13% increase in laaS, Oracle's growth in these key divisions is underperforming the overall industry and significantly lagging the leaders. In other words, Oracle is losing market share in an industry of emphasis.

Foolish Thoughts
With all things considered, Oracle's underperformance in the cloud may seem insignificant, but according to top technology companies like Microsoft and leaders like Amazon, the cloud is the future of technology. It's a market that experts believe will create nearly $47 billion in annual revenue by 2018 , one that's so important that Amazon's cloud business is already estimated to be worth $50 billion today .

Therefore, there are large gains to be created in owning stock of companies that control this market, like Amazon and Microsoft. As for Oracle, it's increasingly difficult to be bullish when its problems in this space are so evident.

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Brian Nichols owns shares of Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, Apple, Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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